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25 Sep

Barry Honig Secretly funded Underwriting in his Laidlaw & Co. Deals: $TRPX

Laidlaw & Co. and Barry Honig, a small cap investor charged by regulators for running a long time pump and dump scheme, worked together to fund the underwriting of firm commitment initial public offerings unbeknownst to main street investors in the IPO’s. According to two senior staffers at Laidlaw, the broker dealer’s clearing firm Sterne Agee stopped honoring their back-stop agreement with Laidlaw in 2016 and wouldn’t put up the net capital needed to sell the small cap offerings. New internal documents given to this reporter show one of the Honig led deals Laidlaw sold is Therapix Biosciences Ltd in which Honig also provided the money for underwriting.

Laidlaw began looking for new clearing firms in 2016 but found that only one other clearing firm, Cor Clearing, was interested in their business–and a due diligence fee of $25,000 per deal would be required before Cor would allow Laidlaw to raise money for any company, according to former Laidlaw employee John Marinaccio. So the firm’s executives, Matt Eitner and Jimmy Ahern, hatched a plan to stay with Sterne Agee and ask Barry Honig to put up the 10% needed to fund the underwriting in the IPO’s he was a lead investor in. According to Laidlaw board minutes from March 6, 2017, Either and Ahern held a quorum of just themselves to approve the loan. Honig used an LLC he owned 94% of called HS Contrarian Investments to make the loan. SEC filings for Therapix say Honig’s co-conspirator in the SEC’s securities fraud case, John Stetson, owns and controls the llc but the SEC says in court filings this is a false statement.

Therapix ($TRPX) is a biopharma company started out of Israel who jumped on the medical marijuana bandwagon during the time of the Laidlaw IPO. The offering was sold for $6 per share. Honig’s long time SEC transaction lawyer, Harvey Kesner, was the lawyer for the IPO. Attorney Kesner is currently being sued for malpractice by one of the victim companies in the SEC enforcement case named MabVax.

Harvey Kesner, Jimmy Ahern, Matt Eitner

After the offering was sold in early 2017, Laidlaw then issued an analyst report giving the stock a buy rating with a price target of $18. The stock had two quick run ups and cliff nose drops since the IPO which could be seen as a pump and dump. Therapix reached a high of $8.94 off its IPO in March 2017 and another high in November 2018 of $8.65. The stock is currently trading below $3 and received a formal warning from NASDAQ about being dropped from the exchange because it wasn’t meeting listing requirements.

A review of Laidlaw financials filed with FINRA show they accepted subordinate loans of $6.25 million in 2016 and $3 million in 2017. HS Contrarian wasn’t the only llc used to fund underwriting in Honig backed deals. Honig also had Mark Groussman and his brother Johnathan Honig use their investment companies to fund some deals, according to a Laidlaw employee who saw internal documents related to the transactions.

Matt Eitner responded to a request for comment saying, “Any public offering that Laidlaw engaged in, including any related documents, as an underwriter have been filed and approved by the appropriate regulatory authorities.”

While Eitner at least had the sense to asked FINRA if they could do the subordinate loans, brokers I interviewed who sold the Therapix offering said they were not told Honig was funding the underwriting and was also investing in the deal. This meant that retail investors were also not informed. Honig secured a group of investing buddies to help him out in what appears to be an undisclosed affiliate group. Laidlaw president Matt Eitner told this reporter, “We always make the appreciate disclosures”. But a current FINRA investigation into Either, Ahern, and Laidlaw shows regulators think otherwise.

Team Honig’s involvement in Therapix was first reported by Chris Carey at Sharesleuth.com.

According to an internal sales and order tracking document for Therapix written by Laidlaw broker Luke Kottke, the $13.7 million raise was 91% funded by Honig and others he trades with as alleged undisclosed affiliates. The document obtained by this reporter shows the investors are: Michael Serruya/Serruya Private Equity, Adam Arviv, Barry Honig/HS Contrarian, Jonathan Honig (Barry’s brother), John Stetson, John O’Rourke/ATG Capital, John O’Rourke Sr., Corey O’Rourke, Andrew Schwartzberg, Iroquois Capital/Richard Abbe, Robert Prag, Adrian James, Roy Langston, Ed Karr,Jason Theofilos, Sean Posner and others. Honig was also able to get a few board seats out of his investment and put Mark Groussman and Eric So on the board. Groussman is a co-defendant in the SEC pump and dump case and has plead guilty. Eric So is also on the board of Riot Blockchain and believed to be one of Honig’s rent-a-directors. Broker Check records for Eric So show he was fired from RBC for multiple violations of personal trading.
If some of these names are not familiar here is how they are related to Honig deals:

– Schwartzberg also was an investor in the April 2017 private placement for Bioptix that preceded its transformation into RIOT. He also invested in the December 2016 Majesco private placement at the time of the PolarityTE agreement, and was an early investor in Marathon Patent.

– Michael Serruya and Barry Honig co invested in land for cannabis farms and dispensary licenses.

– Adam Arviv also was an investor in the Bioptix and Majesco placements, as Acquisition Group Ltd. He was also was a director of Green Growth Brands, and played a role in its “hostile takeover” for Aphria. Text messages, obtained by this reporter, between Adam and Andy Defrancesco and Michael Serruya show they are friends that plan their investments together.

– “Roy Langston” is Ray Langston (full name Charles Raymond Langston III), a longtime Honig investor who was charged with fraud by the SEC in 2013.

– Adrian James is a stock promoter who also got shares in the Bioptix placement – a Honig led deal.

– Robert Prag is a stock promoter who I reported was recently named in a securities fraud suit filed by Mabvax – one of the victim companies in the SEC’s enforcement case against Team Honig. The lawsuit says Prag was paid to promote Mabvax at the insistence of Barry Honig.

– Ed Karr is the current CEO of US Gold Corp. ($USAU). He’s been involved in a number of Honig companies over the years, including Pershing Gold and Majesco. He was a director of Majesco until December 2016, when it agreed to merge with PolarityTE.

– Jason Theofilos was an investor in Bioptix, through JAD Capital. He also was a director and large shareholder of Coinsquare, a Toronto digital currency exchange into which Riot Blockchain invested millions. He also heads MundoMedia, a Toronto digital advertising company in which Barry Honig, Jonathon Honig, Groussman and O’Rourke were investors.

– Sean Posner is believed to be the son of the late Victor Posner, barred by the SEC for fraudulent activities, and whose brother was the late Steven Posner, who also was barred by the SEC. Both were involved with financial felons Ivan Boesky and Michael Milken.

The internal Laidlaw sales tracking document shows the total book for the IPO sold was for $13,720,992 with only $1.2 million coming from Laidlaw’s main street retail customers. Team Honig funded the rest and as the SEC has described in their securities fraud lawsuit this group fits the pattern of an undisclosed affiliate and would have a controlling ownership of the company which was not disclosed. The only disclosure made was John Stetson had a 5.9% ownership. Given we know now that Stetson doesn’t actually own HS Contrarian that ownership statement is now allegedly false. Records show Stetson only invested $600,000 while HS Contrarian invested $1.2 million in the IPO.

Canadian multi-million Michael Serruya, who I reported this month was involved in an investigation by the OSC that included bad boy investor Andy Defrancesco, invested $1.8 million in Therapix. The documents show he was the largest individual investment in the IPO. There were also stock purchases made in the name of Aphria-Colonial Capital of $1.2 million. It’s unclear who owned this investment from the document but a person familiar with the former Aphria CEO says this is Vic Neufeld and Aphria co-founder Cole Cacciavillani’s account. Serruya had made statements to people who work on Bay Street (Toronto’s version of Wall Street) that he was never involved with Barry Honig’s pump and dump scheme but did make investments in companies Honig invested in on the recommendation of Defrancesco and Honig. Defrancesco and Serruya are not named defendants in the SEC enforcement case against Honig.

The internal Laidlaw documents also show a Honig relationship with a South Florida broker dealer called Delaney Equity Group run by David Delaney. The Broker Dealer was charged criminally last year by the Miami DOJ and FINRA revoked their license this year. Employees I spoke to at Laidlaw told this reporter they were often told to send Honig’s shares to Delaney via his account called the Barry and Renee Honig charitable trust. There has been speculation Honig would use shares held at Delaney Equity to trade against the companies he invested in. This ideal was also mentioned in the SEC lawsuit without naming the broker dealer. With the Therapix IPO there was a million dollar worth of shares issued in Barry’s brother’s name, Johnathan, through Delaney Equity. David Delaney was never charged criminally by the DOJ, it’s unclear if he is working was a witness against team Honig in the DOJ’s parallel criminal investigation looking into years of Honig’s group running pump and dump schemes.

Honig settled with the SEC this summer and was banned from trading in penny stocks but is continuing to litigate the amount of fines and restitution he will pay. Honig awaits to see if he will be charged by the Department of Justice.

I have previously reported Laidlaw is under FINRA investigation and the FBI has opened a case investigating the executives at Laidlaw.

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6 Aug

Honig’s Shell Factory Attorney Gregg Jaclin Barred as SEC lawyer

This story has been updated with Jaclin’s criminal sentence

Microcap attorney Gregg Jaclin, formerly of Anslow + Jaclin LLP, has quit his three year fight against the Securities and Exchange Commission who accused him of running a multi-year shell factory scheme. Court documents show a federal judge in Central California approved a settlement on August 1 barring Jaclin from ever practicing securities law or being involved in SEC filings. Additionally, Jaclin is banned from participating in penny stocks even as a consultant. The SEC says it is only seeking $40,473 in disgorgement from Jaclin and forgoing the civil penalty it was asking the court for. That’s because it looks like Jaclin has also settled the parallel criminal case against him and is awaiting sentencing in which a heavy restitution could be ordered. Jaclin’s former partner Richard Anslow was never charged in either case but was mentioned in court documents.

I first reported on the charges against attorney Jaclin in May 2016 for trade publication Growth Capitalist after I uncovered documents that tied Jaclin to another microcap bad actor Barry Honig. Jaclin would sell Honig, and others at the direction of Honig, shell companies that gave the buyer millions in free trading shares when the stock should legally be restricted. Honig, and others like him, would use the shells to reverse merge a private company into and then run a pump and dump scheme. It was Jaclin who signed false opinion letters tricking transfer agents into clearing the stock to trade. Jaclin was charged criminally in 2017 on two counts of obstruction of justice and multiple counts of wire fraud and conspiracy. The Northern California DOJ brought the case against Jaclin and has sealed court filings over the last year. This is the same set of DOJ lawyers leading the criminal case into Team Honig.

Jaclin was a prominent face at small cap industry trade conferences whose firm did dozens of China reverse-mergers. One of the companies in the government’s complaint, YesDTC, was a Barry Honig investment. The CEO of the company, Joel Noel, settled criminal charges in 2014 and it’s unclear what kind of sentence he received after he wrote testimony for the DOJ naming Barry Honig. The sealing of Jaclin’s criminal case and the lack of public announcement about a criminal settlement shows signs Jaclin is also now working as a government witness.

Since the arrest two years ago Jaclin, a New Jersey resident, has set up a business consulting to foreign companies. His website says “Jaclin has shifted away from traditional legal work”. If convicted of a felony he will loose his law license. Part of the SEC settlement says Jaclin can not deny the accusations in the SEC complaint and he must remove any public denials but as usual the SEC let Jaclin off from admitting guilt.

A request for comment sent to Jaclin’s attorney was not returned for comment.

UPDATE 6.30.20 – Gregg Jaclin was finally sentenced in his criminal case yesterday. He plead guilty to two felonies for conspiracy and obstruction of justice in an SEC investigation. His sentence was very forgiving. The federal judge gave him three years probation, three months of home confinement, and no restitution order. He also can’t practice law. The Northern California DOJ asked for their sentencing memo to be sealed because they said it contained confidential information. This is where federal prosecutors describe why they are asking the judge for a light sentence. It could signal Jaclin likely flipped giving the DOJ evidence on another person involved in his illegal public company offering scheme. This is the same DOJ team that is investigating Barry Honig and his associates, according to the SEC. Jaclin could have given evidence against Honig regarding selling Honig’s associates shell companies with restricted shares and then making them free trading before the law allowed.

Jaclin says he is now a consultant to help companies raise money. There is no mention of his felony conviction or his SEC bar on his website.

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7 Jun

New Emails show attorney Harvey Kesner aided Defrancesco in Questionable Cannabis stock Deal: $APHA $SOLCF

Just days after Canadian cannabis company Aphria announced it was paying an exorbitant price for undeveloped marijuana farms in Jamaica and South America from Scythian Biosciences an insider, Andy DeFrancesco, was using Barry Honig’s deal lawyer to move hidden shares within his family. I am reporting for Cannabis Law Report today that new emails written by attorney Harvey Kesner on behalf of the DeFrancescos could show how the insiders skirt beneficial ownership disclosure rules. I reported last week, DeFrancesco’s alleged hidden stock ownership is at the heart of a new securities fraud lawsuit filed against him and his band of sophisticated bad actors by Aphria main street investors.

According to two people familiar with the transaction, some of Andy’s Canadian friends who benefited with him on the deal are: Canadian millionaire Michael Serruya, Marvin Igelman, Lloyd Tomlinson and Clifford Starke. The names of investors on the deal, that ran through a private equity firm Andy controls called the Delavaco Group, is redacted in documents filed with Canadian regulators. The only public details shareholders get to see is how many millions in shares Scythian paid the LLC Andy set up for the assets. You can see Team DeFrancesco celebrating in February 2018 with Andy in Jamaica at a hotspot called Prendy’s On the Beach after they closed on the private cannabis license deal. The photo was posted by Michael Serruya on his private Instagram account.

My story at Cannabis Law Report details a Scythian stock transaction by Andy’s sister Andrea DeFrancesco (a flight attendant) and his wife Catherine DeFrancesco (a yoga studio owner) that appears to show Andy controlling the shares in an off-market stock sale between family on July 23, 2018. This is six days after a C$193 million deal is announce by Aphria and Scythian, which Andy is believed to have significantly benefit from at the expense of Aphria shareholders. When the U.S. broker dealer saw attorney Harvey Kesner was pushing to get the shares through the U.S. clearing system call the DTC the transaction’s legitimacy was challenged. Harvey Kesner was also the SEC reporting lawyer for Scythian during this time, which could create a conflict of interest for the New York law firm, Sichenzia Ross Ference Kesner LLP, that use to bear his name. Read here to get a behind the scenes glimpse of how parts of the alleged securities fraud was run.

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22 May

SEC admits Team Honig is under the criminal investigation I warned about in 2016

The Securities and Exchange Commission has now confirmed there is a parallel investigation into the Team of bad actors that work with Barry C. Honig in the microcap pump and dump ring he allegedly leads. I was first to report in the fall of 2016 that the San Francisco Dept. of Justice was investigating this group, which included Honig, Michael Brauser, and Miami billionaire Philip Frost.

Nancy Brown, the lead lawyer for the SEC in the Team Honig case, said during a hearing on May 15 that “there is a parallel criminal investigation. It’s not a dual investigation, it’s a parallel investigation,” according to a court transcript from the SEC’s case against Honig, Brauser, Frost and friends.

I was first to report the Northern California DOJ flipped their first witness against Barry Honig back in 2014 via a small cap CEO named Joel Noel who plead guilty to securities and wire fraud. Noel, who ran a company called YesDTC, said that Honig knew how to buy shell companies set up by a lawyer who would release shares that should be restricted as unrestricted so trading in their pump scheme could begin fast. Noel also said Honig told him to pay a promoter, named David Zazoff, to get false press releases out to push the stock price up. The lawyer who sold the shell, Gregg Jaclin, was also arrested by the Northern California DOJ in 2017. According to a person involved in the investigation Jaclin and Honig had worked together before and Jaclin could be a viable witness for the DOJ to build their case. Jaclin’s case has been sealed since the SEC brought their charges against Honig.

Why the San Francisco office of the DOJ has waited this long to bring their case while investors in companies like $RIOT, $MARA, $MGT, and $MBVX have gone through Honig lead pump and dumps has been a mystery till now. That’s because at the May 15th hearing about a discovery schedule John O’Rourke’s lawyer Gregory Morvillo tells Judge Ramos he knows some of the defendants in the SEC vs. Honig case have signed tolling agreements with the San Francisco DOJ. This is a stunning admission. Tolling agreements allow the DOJ an extension of time to bring a case past the standard statue of limitations. Attorney Morvillo also said he thinks the tolling agreements have expired as a reason for why the San Francisco DOJ would be bringing an indictment soon. How Morvillo knew about the tolling agreements could signal his client John O’Rourke is one of the defendants that signed one of them.

Scott Zamost and Jenny Schlesinger, two CNBC print reporters, apparently went down to the SDNY court house yesterday and read a copy of the public transcript in the SEC vs Honig case. They were first to report on what the SEC said about the existent of a parallel criminal investigation. The transcript also shows John O’Rourke’s lawyer telling the judge that he thinks someone in the SEC Honig case has become a DOJ cooperating witness now and by that person being a songbird the DOJ could bring an indictment soon. The conversation started because Michael Brauser along with Robert Ladd, CEO of MGT Capital, have been pushing the SEC to show them their evidence via writing aggressive letters to the judge. O’Rourke’s attorney spoke up in court to join that argument. Attorney Morvillo told Judge Ramos “We are behind the eight ball here” in reference to how the SEC has been holding up their evidence.

Morvillo went on to say, “If one or more of our clients gets indicted you can bet we will be back here asking for a stay in this case. In the meantime, while San Francisco drags its feet on this, we don’t think it’s appropriate for the SEC to act as a stalking horse for the U.S. Attorney office.”

I reported this month the SEC has played a stall game putting off defendants in the case from getting discovery by delaying motion filing dates and extending times for defendants like Honig to sign a settlement agreement. The SEC said in a letter to Judge Ramos last month that Honig has agreed to settle their case in principle but it’s not a signed deal yet and the SEC commissioners have to vote on it so the judge gave them a six week extension on the defendants filing their motion to dismiss. Scott Zamost and Jenny Schlesinger at CNBC are likely wrong when they reported that Honig’s settlement was called off.

The court transcript shows SEC attorney Brown was trying to get judge Ramos to scheduled the defendants for depositions with the SEC before all the discovery is due April 30 2020. Robert Ladd, CEO of MGT, Michael Brauser, John Stetson, and John O’Rourke wanted the depositions to be latter in 2020 closer to the end of discovery. The debate in court was the SEC was worried that the defendants would get all their discovery and then assert something called “the act of production doctrine”. This would mean the defendants like O’Rourke and Brauser could tell the SEC they aren’t going to turn over their emails that the SEC has asked for because it could incriminate them in the DOJ case. The SEC said they had from 600,000 to 1.2 million of documents to turn over for discovery. The SEC also admitted a lot of the docs came from a laptop that the ex-husband of a former MGT Capital employee had. It’s unclear if those docs will be admissible since the laptop was likely stolen in a bitter divorce battle, according to a person involved in the case. The whole discovery and deadline delay drama is like an episode of Billions where the government plays dirty tricks to get convictions and the Wall St bad actors have better lawyers to outsmart them.

I don’t know who the new Honig cooperating witness is that O’Rourke’s lawyers says the DOJ has under their thumb. And I highly doubt O’Rourke’s lawyer knows if the DOJ is wrapping up their case unless he has made an agreement for his client to self surrender. Chris Carey at www.sharesleuth.com was first to notice Frost’s company $OPK had mentioned in recent SEC filings that while Frost had settled with the SEC ‘other government agencies’ could also bring a case. John Ford who lives in Northern California was the first member of the group to settle with the SEC before the case was brought and court docs show he has been cooperating. Additionally, another stock promoter who was charged criminally by the DOJ in stocks that Honig did not invest in has made a plead deal with the DOJ this week. Brian Robert Sodi, known as the Mailman, worked with a lot of bad actors in a lot of stocks and the DOJ only charged over a few stock frauds. I have confirmed the DOJ could use him to testify against Honig because Honig had worked with him. Sodi’s attorney Brent Baker of Clyde Snow LLP told me today, “Brian is looking forward to the whole truth coming out now and is now ready to put this matter behind him.” Sodi plead guilty to only one of the ten counts of wire and securities fraud against him and could be asked to pay up to $2 million in restitution. His sentenced will be delayed now until the government is done using him as a C.W.

The CNBC reporters didn’t attend the SEC vs. Team Honig hearing. Or get anyone else in the case to try and talk about who the DOJ recently flipped. They also failed to report the questionable tactics the SEC has been using to try and get the defendants to do depositions before they got all the SEC’s discovery.

Schlesinger and Zamost also mislead their readers when they reported this was the first time a criminal investigation into Team Honig had been confirmed. They broke basic journalistic ethics by not reporting the San Francisco DOJ investigation was first confirmed and reported by me at this publication a few years ago. I had confirmed in 2016, via a lawyer for an investor victim in the case who was interviewed by the SF-DOJ, an interview with a Honig co-conspirator who was also interviewed by the SF FBI, and had a copy of a FBI case number for the Team Honig investigation before I went to print. I did on-the-ground shoe-string reporting to get this important news out to investors unlike the CNBC print reporters who simply read a court transcript first and then executed journalism theft by not linking and credit the first reporter to break the DOJ news. At this publication I always name, link and credit any publication and the journalist who reported news first because it’s likely they have good sourcing on a story and readers should know that.

Additionally Honig was so freaked about about me finding out about the SF-DOJ investigation that he used anti-media lawyer Charles Harder to sue me in 2017 and tried his best to get the story taken down and to get an apology from me. I fought the case for a year and won. Honig dismissed his suit in January 2018 and the reporting stayed up and was sourced in other news reports. Additionally now that we know there were tolling agreements signed I think Honig knew he was under criminal investigation when he sued me and so did his attorney Charles Harder, which is one of the most unethical things a lawyer could do. Clearly the point of the lawsuit was for Honig to try and figure out who I knew was talking to the FBI and SEC. But I held my ground and never told even as discovery was starting.

Criminal charges are the only thing that have a chance of stopping the Team Honig pump and dump ring given the SEC has shown they are accepting low dollar fines from defendants that have settled. Philip Frost paying $5mn is less than his spends in his bar bill in a year. A ban on being a director in a penny stocks could slow Honig down but I don’t see how it helps given he has a file-a-fax of rent a board member guys he can call. The SEC amended compliant, filed in March, clearly shows Honig is willing to break the law and pay others like John Stetson to make hidden investments he is really funding so even if he is banned he could get nominees to do his dirty work. Jail time and a felony convection is the only strong hold the government has if they really want to protect investors and clean up the microcap market. Let’s hope the DOJ gets off their butts and acts soon as there are current Honig pump and dumps happening that likely include PolarityTE, Marathon Patent and RIOT Blockchain.

This story has been updated with details of the tolling agreements with the DOJ and news about the problems with discovery in the SEC case.

May 15th Court Transcript can be read here

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11 Mar

NY Journalist wins lawsuit to unseal court docs tied to Bruce Bernstein Securities Fraud Case: $XSPA

UPDATE 4.2.19: After I won a lawsuit to unseal documents that showed Bruce Bernstein and Richard Abbe mislead investors and the Securities Exchange Commission in public filings another original investor in XpresSpa has filed a similar lawsuit against the $XSPA board and its executives. Swiss resident Roman Kainz filed his securities fraud suit on March 20, 2019 and added a defendant who is William Phoenix of Mistral Equity Partners LLC. The case has been deemed related by the Southern District of New York federal court to the Binns case but the defendants will have extra legal cost litigating another case. Richard Abbe of Iroquois Capital was served with the new suit at his home at 7 Kinsington Rd, Scarsdale NY 10583. Additionally, the unsealed court filings shows that Alan Schwartz, the former CEO of Bear Stearns, was involved with the original investors in XpresSpa along side Kainz and the Binns. It’s unclear if Alan was invested in the deal personally or through Guggenheim Partners the asset management firm where he is a managing director.

Original Text
Two hedge fund mangers that invest in small cap stocks have been working together to hide documents discovered in a securities fraud lawsuit from public shareholders and regulators. Last week one of the key pieces of evidence was unsealed after I won a court case brought by Bruce Bernstein of Rockmore Capital in an attempt to force me to reveal a confidential source used in my previous reporting on his alleged fraud.

The document involves private communication between Bernstein and his ex-wife who had accused him of hiding assets during their divorce. The dispute lasted only a month but forced Bernstein to turn over balance sheet records of the fund he manages called Rockmore Capital. In the divorce communication Bernstein swears he doesn’t actually have any of his own money in a $6 million debt security issued by his fund to an airport spa business called XpresSpa.

Bernstein’s statement to his ex-wife is a complete turnaround to what he told the founders of XpresSpa when he convinced them to take on debt issued by his hedge fund. That’s because the spa founders say Bernstein led them to believe it was him lending the money. Allegedly, a similar lie was repeated in public filings with the SEC when another public company Bernstein invested in, Form Holdings, wanted to merge with XpresSpa. Securities laws require Bernstein to disclose any affiliated or related parties when a proxy statement is filed with the SEC asking investors to vote on a merger with a public company. Since the days of Enron fraud laws were even expanded to tie criminal liability if you lie in proxy statements used to inform investors about who controls or has ownership in companies that are merging.

In the case of XpresSpa, investors were completely left in the dark about the role Bernstein’s buddy Richard Abbe, of American Capital Management, was playing behind the scenes to control the debt of the Rockmore note and force XpresSpa into what became the loss of millions in a disastrous merger.

While I was reporting on the XpresSpa fraud case in federal court I was sent an anonymous email with a filing I thought was currently redacted in court records. A lot of the federal case has sealed documents and redacted motions making it hard to figure out who did what. The court filing I got explained Bernstein’s ex-wife roll in sending what’s been called the ‘Sloan Letter’ (because that’s the last name of the lawyer his ex-wife used) to show her husband likely lied to regulators and shareholders. So I reported another story explaining that.

After the story ran, it appears Abbe and others encouraged Bernstein to sue me to reveal who sent me that document. They thought I had also been leaked private divorce communications and they accused the law firm suing them on behalf of the XpresSpa founders, CKR Law, or the Ex-Wife and her law firm, of leaking them to me. On top that Bernstein chose to file, on November 28 2018, what’s called a motion for pre-action discovery in NY state court, instead of filing a motion in the federal case, and demanded his name and what he was asking for be sealed. He also included a copy of the Sloan letter and said his fund had already lost one client because of my reporting on his alleged fraud. Ironically it was now Bernstein who had given me the hidden document detailing his own alleged fraud by included it in his lawsuit against me! But for four months NY state court said I couldn’t report that!

In an unusual move a state court judge agreed to seal the entire record without any of the defendant being sued having a say. I was served the lawsuit in early December and told I had to wait months to argue that the case should be unsealed. Meanwhile I am still reporting on what’s going with Abbe and Bernstein in the XpresSpa federal lawsuit. Sealing of the case meant NY state court had inflicted prior restraint against me and I couldn’t tell anyone the subjects of my reporting are trying to intimated me with litigation cost and effectively issue a subpoena on me to turn over a source identity. There was no way I was going let that happen.

Luckily once I notified the Reporters Committee for Freedom of the Press about the nature of the lawsuit, Sarah Matthews, got on the case and found me a Big Law media lawyer. Then David Bralow and Kay Murray, attorneys on the board of the Press Freedom Defense Fund started by First Look Media, worked to secure funds to help offset litigation cost and make sure I had one of the best first amendment lawyers representing me. First Look Media owns The Intercept. Getting that call from attorney Mark Bailen of Baker Hostetler and his associate Peter Shaperio, to represent me was a great sense of relief. But I knew we still had a battle. Then the case got the attention of Yale Law professor, David Schultz, who has decades of experience in litigating for the rights of journalist to bring in almost every New York major publication ( NY Times, NY Daily News, Hearst, AP, Gannett, NY Post etc..) to file what’s called an AMICUS brief. Another giant in media law, attorney Robert Balin, of Davis Wright Tremaine, also came on the AMICUS brief team and they made a fling to join my case in support our argument that as a freelance journalist I should be granted reporters privilege and not forced to reveal a source. They wrote a strong argument for the public’s right to an open judicial system demanding the whole case must be unsealed. Attorneys Robert Balin, David Bralow and David Schultz even showed up at my hearing giving me a bench of five top media lawyers to face the judge. I had a powerhouse behind me who clearly cared about the first amendment.

Bernstein and Abbe’s plan use the courts to intimidate and tie me up financially didn’t work. Instead I got a war room of litigation help and won!

Abbe, who is also the co-founder of Iroquois Capital, has been working with Bernstein for over a decade as an alleged group of undisclosed affiliates in multiple stocks with the intent to control company boards, management, and assets for the benefit of their hedge funds. In an interview with a trade publication a few years ago Bernstein boasted his funds average return was 9 Percent. Once in control, the hedge funds allegedly manipulate the stock price while gutting company cash and then discard the carcass of the company turning it into a useless shell corporation with a stock price in the pennies. The XpresSpa litigation details similar fraudulent takeover schemes in a company called Neurotrope and TapImmune.

For years, Abbe’s fund has also partnered with Barry Honig who is currently accused by regulators of running pump and dump schemes in over 70 public companies. I have previously reported Abbe’s Iroquois Capital was also named in the SEC subpoena sent to MGT Capital asking for communications from the group of Honig related affiliates. In the new amended complaint field March 8th by the SEC the regulator mentions there are other unnamed parties that helped manipulate the stock of MGT Capital during the time Iroquois co-founder Josh Silverman was on the board. It’s unclear why the SEC didn’t name Iroquois as a new defendant for their likely role in the MGT Capital pump and dump.

After I won the Bernstein lawsuit and his name became public I received a new tip from a person familiar with the situation that Bernstein and Rockmore had been through their own SEC investigation surrounding accusation that they shorted the same stocks they were doing PIPE investment with. The New York bucket shop lawyer Bernstein had hired to sue me, Peter Cane, started threatening me on Thursday after I asked if the past SEC investigation was true. Eventually attorney Cane admitted on behalf of Bernstein that the SEC had investigated but no charges were brought and the investigation ended in the summer of 2008. Cane called the investigation routine.

In my decade of reporting on securities fraud I have never seen a ‘routine’ SEC investigation. This kind of bully tactic by Cane was not a surprise. Once we got to court on March 5th, my attorneys saw what I had said from day one. This is case is about trying to discredit and intimidate me and less about trying to find out who leaked divorce documents. You can see in the court transcript below that attorney Cane began by trying to argue I was not working as a journalist when I first reported on Abbe and Bernstein but instead was being paid by Short Sellers to discredit the company. This is absolute not true and is never true in any of the reporting I have ever done here or any of the major media companies I have reported for. In the case of XpresSpa that short seller argument doesn’t even make sense. As of Friday I checked on how many shares could actually be borrowed to start a short trade on XpresSpa. The answer was only 20,000 shares. The interest to borrow those shares was as low as 9 percent. Joe Spiegel of Dalek Capital who runs a short selling fund told me, “there isn’t much demand to short XpresSpa. Sometimes borrow fees can get to 100%-200% or higher, like for Tilray. 9% shows no cares about shorting XpresSpa.”

Judge Franc Perry who presided over my case put Attorney Cane in his place pretty fast when he started the argument that I am not a journalist. Judge Perry said ‘Ms Buhl is conducting news gathering”. Judge Perry also said Cane had shown no evidence to support any other conclusion. Page 19 of the court transcript says in the eyes of New York Supreme court “the Court has not seen any evidence to show that your client is not a journalist, and for the purpose of the Court, in reading this, the Court understands that your client is a journalist, is a newsperson, under the law.” This was a strong on the record statement to the testament of my reporting work because these days you never know how judges are going to view freelance journalist who report online, especially ones running their own publications.

Judge Perry also grilled down on if the Sloan letter was even a confidential document. In the federal court case, Judge Stanton has said it will be sealed because it was part of a divorce proceeding, unless anyone can prove other wise. A notion CKR Law lawyers Rosanne Felicello and Michael Maloney have sought challenge in court documents for their clients the co-founders of XpresSpa. Given Bernstein also sued his ex-wife and the law firm she hired to see if he was hiding martial asset; they hired lawyers who showed up at my hearing. Both told the judge this letter was written after the divorce was finalized and as a result neither of them considered the letter confidential nor did they agree in writing to make it confidential. So once again Bernstein’s attorney Peter Cane had now brought forward a reason for a state court court to rule the docs a federal court judge thought should be seal shouldn’t!

If attorney Cane had never brought this action against me the documents Bernstein and Richard Abbe have worked so hard to keep hidden likely wouldn’t be front and center of a news story and available to the public for free.

XpresSpa isn’t a stock with a lot of trading volume these days. It trades on the low end tier of the NASDAQ under $XSPA. But if this group wants to start another pump and dump on the stock they have the control to do it. More importantly it’s Bernstein and Abbe’s history of hiding ownership of debt notes or even stock ownership that makes their actions newsworthy. There are so few journalist covering small cap stocks these days which is why I pick stories like these to report on with the intent to inform the investing public because history shows the SEC isn’t going to move fast to protect investors in real time.

EDITORS NOTE: I want to first thank my attorneys Mark Bailen and Peter Shaperio. They wrote incredible legal arguments and provided a zealous defense. I also want to thank New York Daily News journalist Stephen Rex Brown for reporting on my case twice and showing up for the two hour hearing. The Reporters Committee for Press Freedom and the Press Freedom Defense Fund really stepped up to help a freelance journalist and as a result we now have case law in New York that recognizes reporters privilege for freelancers and rules on how important it is to have a court system with open records. Additionally, readers who donated additional funds needed to cover reporting cost were critically to getting this story out.

Editor’s Note: This story has been updated.

Unsealed Court Document in XpresSpa fraud lawsuit:

Unsealed Bruce Bernstein Di… by on Scribd

New York Supreme Court case #655887/2018 Transcript Bernstein vs. Journalist Teri Buhl:

Bruce Bernstein vs. Journal… by on Scribd

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16 Aug

Iroquois Capital’s Richard Abbe Sued For Fraudulent Takeover Scheme of XpresSPA

A co-founder of Iroquois Capital, Richard K. Abbe, is being accused of a fraudulent scheme to trick the founders of an airport spa business, XpresSpa, into a merger with a public Microcap company that resulted in a massive loss of their business investment. On August 6, a federal judge in New York allowed a securities fraud case to go forward against Abbe and other company executives. The lawsuit, which was filed in November 2017, has claims of undo influence, deception, and kickbacks used to effect a merger takeover by Form Holdings. Two claims of Securities violations consisting of 10(b)5 and Section 20 survived the defendants motion to dismiss.

Moreton and Marisol Binn, the XpresSpa founders, alleged two members of their board, Andrew Heyer of Mistral Equity Partners & Bruce Bernstein of Rockmore Capital Group, hid their financial ties and personal relationships to Form Holdings board member Richard Abbe and Salvatore Giardina along with its CEO Andrew Perlman before the 2016 merger. The complaint alleges by covering up their cozy relationship it allowed the XpresSpa directors to mislead the Binns on how much they would earn if the merger completed. And in turn the vote to approve the merger was a coordinated and premeditated effort by Bernstein, Abbe, Perlman and Giardina to deceive the Binns and other minority shareholders to take an all-stock, no cash, sale price to enrich themselves at the Plaintiffs’ expense.

The fraud claims surviving the motion to dismiss is a rare event in securities ligation for Microcap companies. That’s because most companies, including XpresSpa, sign joinder agreements that release all the parties from this type of litigation. Additionally, the investment funds like Iroquois or Barry Honig’s team of investing affiliates have typically bled dry the small company CEO’s stock barrel of cash by the time they have figured out they’d been deceived and can’t afford to file a lawsuit. But the Binn’s aren’t the kind of men to lay down to alleged market manipulators. With their ability to afford seasoned securities litigators like Rosanne Felicello and Michael Maloney of CKR Law LLP, it appears a compelling legal argument was made to blow through the general release of ligation and convince Judge Stanton to move the case forward. The defendants lawyers at Mintz Levin even tried intimidating tactics to scare the Binns into dropping the case by filing motions for sanctions against their attorneys for bringing the lawsuit in the first place. Attorney Francis Earley, of Mintz Levin, sent multiple letters to Attorney Felicello basically warning it doesn’t matter what you think happen the joinder agreement release doesn’t allow you to sue the defendants. But this month Judge Stanton said the defendants lawyers were wrong and the Binns could sue. The Judge wouldn’t even grant an oral argument to hear their motion to dismiss or sanction claims. Instead the judge ruled on the detailed information about the alleged fraud that was laid out in the briefs. Net Net I bet Richard Abbe, who I have previously reported on for his funds role in some questionable financing with MGT Capital, is starting to get a little worried about what is going to coming out in discovery.

The trouble started for the Binns when XpresSpa took a high interest senior secured loan from Rockmore Capital which is owned by the company’s director Bruce Bernstein. Besides securing anything in the company that had value against the loan there were also stringent covenants put in place that allowed Rockmore to force a default on the loan. Such as when a full audit didn’t arrive on the date Rockmore asked for it a default event occured that allowed Rockmore to add $500k of interest to the loan and scared off previous lenders, like BofA, from offering a credit facility at lower market rates. Putting the loan into default also put Bernstein in a control position over the company enabling him to significantly influence merger decisions.

Before the merger in August 2016 XpresSpa was having cash flow problems that lead to their inability to keep adding nail spas in airports and keep up with competitors. And a $6.5 million debt due in 2018 was a big thorn in their side. So when the idea of merging with a public company, that had been in the Patent troll business, and claimed to be worth $35.1 million came along it didn’t look so bad to the Binns. Especially given XpresSpa board member Bernstein made promises that once the merger was complete Form Holdings would get rid of their Rockmore debt and spend dollars on XpresSpa shops expansion into new airports, according to the lawsuit. The Binns were also led to believe the new publicly traded stock they would get was actually worth some money and would only go up in value because Form Holdings had real venture deals with companies that had valuable patents and cash flow.

But none of that happen. The complaint details how Richard Abbe, through a $12.5 convertible debt deal with Form Holdings via his investment fund Iroquois, was able to load up on equity in Form Holdings via a debt to stock conversion. Form Holdings use to be called Vringo Inc. On May 9 2016, before the merger, Abbe secured a seat on the board of Form Holdings. SEC filings for both companies claim Abbe and Bernstein were independent directors of their perspective companies. Yet both men had chock holds on XpresSpa and Form Holdings because they were also their substantial creditors.

After the merger completed the Binns say Form Holdings started to sell off, for very little money, the ventures tied to patents that they claimed had millions in value. One reason for this could be the patents value were really just speculation sold as a fabulous future cash flows but the Form Holdings directors knew what looks good on paper doesn’t turn into real cash.

The lawsuit also alleges “Members of the Controlling Group, acting through various investment vehicles such as
Rockmore and Iroquois, have coordinated similar changes in control or other coordinated
activities with respect to GeoResources, Inc., USA Technologies, Inc., and TapImmune, Inc. ”
[The control group consist of: Abbe, Perlman, Bernstein and Giardina.]

Now here is were things can get dicey for Abbe and Bernstein. In a brief responding to the defendants motion to dismiss we see the plaintiff allege that Abbe, directly or through another investment vehicle or another person he controls, put some of the money up for Rockmore to lend $6 million to XpresSpa. Remember Abbe doesn’t show up on this deal in public filings until there are merger talks. And the Binns will say they never heard of Richard Abbe until they were introduced to the idea of merging with Form Holdings. What has me extra curious is what kind of documents have been put under seal in this case. Is there some kind of proof the Plaintiff has discovered to prove Abbe’s involvement in RockMore?

I emailed Bruce Bernstein directly to see if he wanted to respond to this allegation but as of press time I had no response.

But that’s not all Team Abbe allegedly did in this deal.

Form Holdings CEO Perlman, already a member of the board of Form Holdings, arranges to have Bernstein also appointed to the Board of Form. Perlman and Bernstein then arrange to have Abbe appointed to the board of Form. At the same time, Bernstein used his position as a board member of XpresSpa to cause that company to enter into the onerous Rockmore Note. Bernstein, Perlman, and Abbe then offered Heyer a sweetheart deal if he would assist them to facilitate a merger of XpresSpa into Form .The lawsuit claims XpresSPA director Andrew Heyer would be given a ton of stock, valued at $2.31 per share at the time of transaction, if he voted for the merger and the Binns were never told he was going to get this stock if he approved the deal. As far as Bernstein goes, he also got the highest amount of compensation the new company bylaws would allow, was put on the audit committee, the compensation committee and made a member of the new company board. It’s this quid pro quo alleged in the complaint, which I would call a kickback, that allowed the Section 20 violations to be litigated. Claims that you’d hope the SEC would take notice of. Net-Net the Securities and Exchange Commission has laid out in previous enforcement cases that “You can’t bribe executives with stock to motive their vote and not tell other shareholders about it”.

Honestly this whole scenario reads like the Control Group’s corporate attorneys needed to go back and read the Securities and Exchange Act definition of an independent director and disclosure rules because it looks like their clients can’t really be relayed upon to tell the whole truth. And clearly the fact pattern was enough for Judge Stanton to say if this is true then that’s material information that was omitted and it’s worth going threw discovery to build a case for trial.

Recently signs of worry about what will come out in discovery appear to be showing up via the exodus of high level executives. On July 23rd attorney Felicello wrote Judge Stanton expressing serious concern that limited discovery was going to have to be allowed. This is before the decision on the motion to dismiss came down. Anastasia Nyrkovskaya, the CFO of Form Holdings who could also be a key witness to the facts underlying the lawsuit announces she is leaving the company. And so did the senior V.P. of legal and business affairs for XpresSpa Jason Charkow. The defendants lawyer wrote back the company has preserved all their communication and attorney Felicello was over reacting. But the fact of the matter is if these two bail to another country getting them to show up for a deposition subpoena might prove difficult.

Additionally the company just filed with the SEC announcing they have a $20 million goodwill write down. This is basically saying they don’t think the brand XpresSPA has held value and they might be bailing on the whole airport spa biz. Something they promised they’d grow at the time of the merger, according to the lawsuit.

The defendants have till the end of the month to answer the lawsuit. And then the interesting part begins as discovery happens and these alleged bad actors have to go through sworn depositions.

The Plaintiffs attorneys would not comment on the case. The defendants lawyer didn’t respond for comment. Some of the claims for unjust enrichment, negligent misrepresentation, and breach of fiduciary duty were thrown out of the case. But the strongest claims of Section 10(b)5 and Section 20 violations remained. The company Form Holdings is also a defendant in the case. Remember if you prove fraud (Section 10b5) you get to ask a jury for triple damages.

Form Holdings changed its ticker symbol this year so you can now find them under ticker $XSPA.

Editors Note: This type of reporting is costly from researching volumes of legal documents and corporate records. Donations are important and very helpful to keep this publication going.This publication does not take donations from the subjects of a story.

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26 May

Microcap Attorney Jaclin’s Co-Conspirator Turned DOJ Witness in Shell Factory Scheme

This story has been updated

A 20-year veteran of Microcap financing deals, attorney Gregg Evan Jaclin, has been charged with running a shell-factory shop and securities fraud for nearly a decade. Yesterday I reported at Growth Capitalist the government has been building their case against Jaclin and his co-conspirator Imran Husain for years. Jaclin is accused of filing false opinion letters that allowed stock, which U.S. securities law says should be restricted, to freely trade within months of a private company going public through buying one of the Jaclin/Husain shells.

Jaclin, who denies the SEC charges, is currently working in the industry as the chairman of the corporate securities group at New Jersey-based Szaferman Lakind LLP. He lives in a million dollar home in West Windsor, NJ with his wife, Jill Gartenberg Jaclin, and their two kids.

Gregg And Jill Jaclin

Gregg And Jill Jaclin

Jaclin previously co-owned a law firm, Anslow & Jaclin, where he allegedly issued false SEC filings for the public shell companies named in the government’s complaint. Jaclin’s former partner Richard Anslow joined another top microcap financing law firm, Ellenoff Grossman & Schole LP, in October 2013. Anslow acknowledged he was interviewed in the SEC investigation of the shell factory scheme, according to his managing partner Doug Ellenoff. Ellenoff also told this reporter Richard Anslow doesn’t believe he is still part of the SEC investigation. I was able to ask Anslow face to face, at the Marcum Microcap Conference in NYC on June 1st, if the SEC had directly told him he is no longer part of the investigation, which centers on false filings and opinion letters written by a firm (Anslow+Jaclin) he co-owned. Anslow shook his head when I posed the question and started to walk away from me really fast. I followed him asking the question again along with asking “are you running away from a reporter’s questions”. Anslow escaped and I never got my answer. Anslow has not been charged by the government in this case.

The Securities and Exchange Commission complaint against Jaclin was filed by the regulator’s L.A. office in the district of Central California federal court on May 12, 2016. The SEC thanked the DOJ team in Northern California for assisting them in building their case but I found it odd they didn’t mention parts of Husain’s sworn plea agreement that talked about Jaclin’s role in coaching Husain, in 2012, to get some of the puppet CEO’s of the shell companies to lie to the SEC when the regulator began investigating who actually had control of the companies. It makes me wonder if these details are being saved for a DOJ criminal complaint against Jaclin. When I reached one of Husain’s lawyers, Victor Sherman, he told me he thought criminal charges were coming against Jaclin.

Nine shell companies were listed in the SEC complaint as being fraudulently built to look like real companies but in my investigation of the alleged scheme I found there were a lot more deals that fit the same pattern as described by regulators. Such as the case against Cary Lee Peterson who bought a shell from Jaclin and reverse merged a company called RVPlus. Although Peterson was arrested in March Paul Fishman, the head of the DOJ in New Jersey, didn’t get a jury to indict Peterson until May 10th- 2 days before the SEC filed their complaint against Jaclin. In the Peterson case the government quotes emails between Peterson and the “lawyer on the deal” negotiating the price of the shell. SEC records show that lawyer is Gregg Jaclin. Peterson is quoted saying ‘I’m not paying that price’ if the restriction on the legend for the shares isn’t removed so I can trade these shares within the first few months. Jaclin and Husain charged between $215k-$425k, which is high, per shell company they sold.

Private companies will pay more for a shell if it’s considered a ‘clean shell’. This means the public company has reported to the SEC for a year and it has a real business plan with at least 40 different shareholders. The scheme laid out in the SEC complaint says nominee shareholders were made up and Husain hired puppet CEOs to pretend to run the companies when it was really him pulling the strings. It’s those actions that are a BIG no-no, according to the SEC.

The New Jersey DOJ confirmed the RVPlus CEO, Cary Lee Peterson, was unable to post bail last week and had to get a public defender, which makes me wonder if the DOJ will also press him to turn government witness against Jaclin and others in the scheme. So far there are no public criminal charges against Jaclin but the pressman for the DOJ in Northern Cal reminded me there could be a sealed indictment against Jaclin that no one knows about.

Allegedly lying in SEC financials for public companies and writing false opinion letters isn’t the only thing Jaclin is culpable of. In 2011, Jaclin and his former law partner Richard Anslow made a press announcement that they were going to merge with a New York-based top-billing microcap law firm named Schenzia Ross Friedman Ference LLP. Yesterday, I reported at Growth Capitalist the merger quickly fell apart because the partners at Schenzia Ross were uncomfortable with some the deals Anslow+Jaclin worked on. Even though no merger docs were ever signed to form the new firm, I found Jaclin was signing opinion letters for S-1 filings with the firm name: Schenzia Ross Friedman Ference Anslow LLP in 2011 and 2012. One such filing was for Health Direct, an issuer listed in the SEC complaint against Jaclin. Harvey Kesner, a partner at Schenzia Ross, told me after reviewing the SEC filing of Health Direct with other partners of Schenzia Ross, “the filing was not on behalf of SRFF and the use of any portion of the firm name is unauthorized”. Signing the wrong law firm name could make an issuer’s S-1 filing considered a false opinion in the eyes of the SEC.

If the statements Husain made in his plea deal are true then Jaclin would have known the SEC investigation started as far back as at least August 2012 when one of their puppet CEO’s was called in for questioning. From that point on when the SEC started asking Jaclin questions he had a legal obligation to tell the issuers trading exchange, OTC Markets, that he was under investigation. OTC’s contract with attorneys who represent Issuers with opinion letters published on their trading platform clearly states under rule 12 in the Attorneys Agreement:

The letter must state to the best knowledge of counsel, after inquiry of management and the directors of the Issuer, whether or not the issuer of the Securities, any 5% holder, or counsel is currently under investigation by any federal or state regulatory authority for any violation of federal or states securities laws, and if so, the details of such investigation must be provided in such letter.

Imran Husain is the only co-conspirator of Jaclin’s named in the SEC complaint. But it’s possible more players in the microcap space will be arrested by the DOJ or charged with an enforcement action by the SEC. One name that comes to mind is microcap financer Barry Honig. I reported for Growth Capitalist the CEO of YesDTC, one of the issuers in the Jaclin complaint, was also arrested and made a plea deal with the DOJ in 2014. His name is Joe Noel. Noel and Husain both said in sworn testimony it was Barry Honig who bought the shell (created by Jaclin/Husain) that YesDTC merged into. The SEC successfully charged YesDTC for being a pump and dump. Noel then went on to say that Barry Honig ‘made him’ hire a stock promoter to aid in the pump and dump of YesDTC and alluded to the notion that Honig was also a control person in YesDTC. This matters because it affects Honig’s 9.99% investment in the company and his timing of when he can sell his shares. Honig has gone on the record through his attorney, Harvey Kesner, that he was not a control person of YesDTC, that he was cheated by Joe Noel, and Noel is lying in his DOJ plea statement. Honig has never been arrested or charged by the SEC for his role in investing in microcap stocks.

Editors Note: May 26 2016
When Jaclin learned I was reporting on him he called my cell phone late Friday night, which was the day after his SEC charges were announced, and left a voice mail he wanted to talk. It was past 9pm and I didn’t call him back that night. At 7am Saturday he then tried to write a somewhat threatening letter to an editor, Shelly Kraft, who he thought I was reporting for. Jaclin tried use the fact his firm had spent money sponsoring conferences of Kraft’s in the past and as a result he should be able to control the line of questioning I was doing researching his background. When I saw the emails Saturday I reminded Jaclin, via email, I am a freelance journalist who is isn’t controlled as a staff writer by any publication and if he had complaints they should come directly to me. I had also pointed out Shelly Kraft doesn’t own the publication I was planning on selling his story to. After that he refused to return my calls and asked for questions in email. Once he saw I had the DOJ secret plea deal from his co-conspirator I got an email late Saturday night that he’s hired an ex-SEC lawyer out of Colorado who instructed him not to comment on the case. But Jaclin couldn’t help himself and still tried to reach out to influence reporting on his case, this time to the correct editor of the publication I sell stories too; his goal appeared to be to muzzle me. Luckily I have an ethical and amazing editor at www.growthcapitalist.com who politely listened to Jaclin’s fear that reporting on his SEC fraud suit and other possible crimes is ’embarrassing his kids’ but my editor didn’t try to stop me from looking into other deals Jaclin might have done that are not legal and gather more evidence of his alleged crimes. The level of reporting and type of coverage I am allowed to do at www.growthcapitalist.com is unique, impactful, and full of details to help inform and warn the market. As a result the coverage is behind a paywall and you have to pay for it. I encourage anyone who invests in small cap stocks or cares about free markets to try subscribing. It’s worth it!

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7 Nov

Feds Finally Arrest DiScala’s Microcap Attorney Ofsink

It took the Dept. of Justice over a year to use documents seized in the arrest of microcap financer A.J. Discala to nab his deal lawyer Darren Ofsink of Merrick, NY and the co-founder of the broker dealer, Halcyon Cabot Partners, DiScala used to allegedly execute stock manipulation in multiple emerging growth companies. In an exclusive interview with DiScala last year Ofsink’s name came up as a possible government witness against DiScala. Based on emails and deal documents in a publicly traded company called CodeSmart, seen by this reporter, it didn’t make sense that Ofsink wasn’t arrested with DiScala last summer. We now see the Brooklyn DOJ lawyers just needed to flip some of those arrested (AJ’s partner Mark Wexler) with AJ to get the necessary goods to issue a warrant for attorney Ofsink. The SEC followed the DOJ’s led on this case and also issued an enforcement action against Ofsink for stock manipulation Wednesday along with Morris and Halcyon’s co-founder Ronald Heineman.

I reported for Growth Capital Investor on Wednesday that Ofsink is accused of hiding beneficial ownership of stock for multiple people involved in the alleged pump and dump scheme. If you hold more than 5% of a company’s stock it must be publicly disclosed. Even more so if you were a financier on the reverse merger or public offering. The feds are also accusing Ofsink of helping CodeSmart create a sham consulting agreement so the company could move 750,000 shares to customers of two stock brokers arrested in this case. The shares came from deal insiders like DiScala who were initially given the stock at $.023. The idea, alleged crafted by Discala, Ofsink, and the CodeSmart CEO Ira Shapiro, was to give the aggrieved mom and pop investors deep discounted shares ($.14) so they wouldn’t complain to the Feds about the sudden drop in CodeSmart’s shares. There are also accusation that the trio wanted to create buying action in the stock during a downturn– the downturn was created by DiScala and team pump and dump. The SEC in a parallel suit is under the impression DiScala offered up his shares to aggrieved investors to make money but this doesn’t totally make sense given he could have sold them on the open market for soooo much more. Additionally there is no law against giving away shares.

The government’s case in this exchange appears to rest on proving the trio issued false sec filings about the ‘cheap shares to investors’ deal and mislead the rest of investing public. Ofsink as the deal attorney on CodeSmart should have known this was a no-no. DiScala in our interview of course said he was relying on Ofsink’s legal counsel if the transaction was ok.

A search of SEC public filing shows Ofsink, founder of New York-based law firm Ofsink LLC, has represented more than 50 public companies in financings. Bill Meagher of The Deal reported, Data from PrivateRaise shows that Ofsink represented either issuers or investors in a total of 39 transactions that raised a total of $348.1 million.

Ofsink also had a robust practice with China reverse merger deals that went public in the U.S., representing around 32 companies. Ofsink was often seen showing off photos of him eating scorpions during his China trips at microcap industry conferences. The biggest fraud he represented was $RINO, Rino International Corp, who settled with the SEC after the company executives were accused of overstating revenues and using company funds for their personal pleasures. RINO was kicked off NASDAQ in 2010.

But this wasn’t the only illegal action this crew took. The SEC has figured out Halcyon Cabot was allowing DiScala to trade his CodeSmart shares without having the money in his account to pay for it. One of the arrested Halcyon brokers, Craig Josephberg, was using money from the brokerage’s own account to fund DiScala’s trades, according to the SEC complaint. It wasn’t until the brokerage’s clearing firm said they were going to halt all of DiScala’s trading unless he paid $1.5 million due in trades completed, that the brokerage finally did their fiduciary duty and stopped DiScala trading. Apparently this whole lack of supervision by Morris and his co-founder Heineman is what got the SEC mad enough to charged the duo on Wednesday.

Ofsink and Morris, through their attorneys have made press statement that they plan to fight the DOJ charges through trial. Both pled not guilty and were released the same day on $1 million bond. The DOJ said in their complaint they plan to go after the men’s homes or any other assets they think they bought off their alleged illegal gains.

Last September I wrote a long piece called the Seedy World of Microcap Advisors. It’s been the most read story of the year on teribuhl.com. Based on my exclusive interview with DiScala and others he put me in touch with, along with a binder full of deal documents and emails, I reported there are other bad actors in this deal. Namely Joe Salvani and Ben Walsh, two microcap financing consultants who have some how escaped arrest so far. Salvani was sued by the SEC during this dot.com days but has never been arrested for his role in multiple microcap deals.

The DOJ claims the DiScala and crew fraud amounted to $300 million in illegal profits between all but that doesn’t add up and reads like a headline number Loretta Lynch needed to pump up her run for U.S. Attorney General. The DOJ and SEC often take the highest price a stock traded for and assume that’s when the pumpers sold and then just throw out the number in their press releases. When they get through discovery you often see how wrong they were and that’s why we see cases settle for so much less. Honestly if AJ Discala had even made $20 million on this deal we likely would have left the country with his smart, beautiful new wife, way before his arrest. Keep in mind AJ knows real estate from his family’s business and then managed his ex-wife actress Jamie Lynn Singer. He wasn’t even licensed in the world of micro-cap financing and based on our interviews he doesn’t believe he did anything criminal. That might be because he doesn’t how the laws work on securities financing and Ofsink was the perfect attorney to let him think this was all OK. Or he is just a really good actor and salesman and made me think he is dumber and inexperienced than he really his.

Watch for more reporting at www.growthcapitalist.com on the bucket list of illegal things broker dealer Halcyon Cabot was doing outside of the CodeSmart fraud next week. At least FINRA was finally revoked their license last month. If you were an investing client on Halcyon I would love to hear from you – teribuhl@gmail.com.

Donations are always helpful for this kind of shoe-string beat the street reporting , which other papers I’ve reported for often ignore because the firm size and players are considered too small. In my view fraud is fraud and it all needs reporting.

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